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FAZAL TEXTILE MILLS LTD - FINANCIALS
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BALANCE SHEET FY'05 FY'06 FY'07 FY'08
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Property, plant and equipment 666,272 652,327 741,516 719,115
Operating fixed assets 3,670 - 250 914,782
Capital work in progress 669,942 652,327 741,766 1,633,897
Long term loans 4,121 2,729 15,695 13,929
Long term deposit 532 532 532 532
NON-CURRENT ASSETS 1,344,537 1,307,915 1,499,759 3,282,255
Stock in trade 687,619 484,255 329,953 601,284
Trade debts 235,954 649,618 646,461 841,740
Loans and advances 15,423 27,643 42,277 168,523
Trade deposits & short
term prepayments 9,640 10,513 5,501 15,901
Cash and bank balances 3,498 2,007 1,514 14,552
CURRENT ASSETS 1,024,765 1,213,208 1,066,294 1,680,373
TOTAL ASSETS 1,699,360 1,868,796 1,824,287 3,328,731
Total Equity 712,688 745,838 709,908 719,948
Long term finance - - - 1,000,000
Deferred gratuity 13,458 25,095 28,338 29,032
Deferred taxation 77,075 61,506 54,110 50,445
NON CURRENT LIABILITIES 90,533 86,601 82,448 79,477
Trade and other payables 112,071 102,738 267,442 156,057
Accured markup 9,693 15,338 17,196 48,936
Short term borrowings 774,375 918,079 747,293 1,324,313
CURRENT LIABILITIES 896,139 1,036,357 1,031,931 1,529,306
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INCOME STATEMENT FY'05 FY'06 FY'07 FY'08
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Sales 1,642,382 2,027,303 2,263,195 2,444,146
Cost of Sales 1,480,091 1,851,733 2,142,018 2,304,242
Gross Profit 162,291 175,570 121,177 139,904
General & administrative expenses 29,059 38,060 35,630 31,903
Selling & distribution expenses 10,627 12,894 14,552 13,384
Other operating income (2,019) (3,622) (6,466) (3,826)
Other operating charges 5,050 2,708 66 2,028
Operating profit 119,574 125,530 77,395 96,415
Financial cost 41,407 74,071 76,159 69,054
Profit before taxation 78,167 51,459 1,236 27,361
Tax 37,285 2,840 21,697 17,321
Profit/(Loss) after Taxation 40,882 48,619 (20,461) 10,040
EPS-basic and diluted (Rupees) 6.61 7.86 (3.31) 1.62
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RATIO ANALYSIS
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Profitability FY'05 FY'06 FY'07 FY'08
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Gross Profit Margin 0.10 0.09 0.05 0.06
Profit Margin 0.02 0.02 -0.01 0.00
ROA (RHS) 0.02 0.03 -0.01 0.00
ROE (RHS) 0.06 0.07 -0.03 0.01
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Liquidity FY'05 FY'06 FY'07 FY'08
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Current Ratio 1.14 1.17 1.03 1.10
Quick Ratio 0.33 0.67 0.68 0.68
Cash Ratio (RHS) 0.00 0.00 0.00 0.01
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Asset Management FY'05 FY'06 FY'07 FY'08
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DSO 52 117 104 126
ITO 170 95 56 95
Operating Cycle 222 212 160 221
Total assets turnover (RHS) 0.02 0.03 -0.01 0.00
Sales/ Equity 2.30 2.72 3.19 3.39
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Debt Management FY'05 FY'06 FY'07 FY'08
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Debt To Equity 1.38 1.51 1.57 2.23
Debt to Asset 0.58 0.60 0.61 0.48
Long term debt to equity 0.13 0.12 0.12 0.11
TIE (RHS) 2.89 1.69 1.02 1.40
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Investor Expectations FY'05 FY'06 FY'07 FY'08
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Market Value (RHS) 79.00 150.00 278.50 778.14
EPS 6.61 7.86 -3.31 1.62
P/E (RHS) 11.95 19.08 -84.14 480.33
Book Value 0.12 0.12 0.11 0.12
Textiles: FAZAL TEXTILES MILLS LIMITED - Analysis of Financial Statements
Financial Year 2005 - Financial Year 2008

OVERVIEW (October 02 2009): Fazal Textiles Mills is one of the older mills of the
country. It is located in Karachi and was taken over by the Yunus Brothers group in
March 1987, when it had been closed down since 1984, due to heavy losses.

The new management took prompt and comprehensive steps to revitalize the unit by
discarding the old machinery and imported the latest machinery and installed it within a
year. Presently, FZTM is producing yarn, knitted fabrics, bed sets and fitted sheets.
Export sales are mainly to Far Eastern, European, the US, South American, North
African and Middle East markets.

Industry Performance:

In 2007, economy of the country took a downward turn due to the political crisis,
affecting the inflationary rates and fiscal deficit and the recession in the US. The most
affected sector was the textiles. All the companies, major players or small ones took a
massive blow in that year. Fazal Textiles also took a blow in 2007, as its financial values
were badly affected. But the company showed a remarkable progress in 2008, as in three
quarters, its financial statements are quite positive.

Today in Pakistan, we see that the entire textile sector is in a bad shape. Many mills have
been forced to shut down due to the constantly increasing problems of high production
costs, which make them uncompetitive in the global markets and locally as well, as today
our local markets are flooded with foreign products. The government policies are also not
of much helpful. In view of all these issues, Fazal Textiles is going through a hard time to
avoid difficult situations.

PROFITABILITY

Gross sales of the company stood at Rs 2.58 billion in FY08 (FY07: 2.38 billion). The
exports contributed Rs 1.91 billion and local sales Rs 672 million (FY07: exports Rs 1.81
billion, local sales Rs 575 million). Exports and local sales exhibited 6% and 17% growth
respectively. The net sales in FY08 stood at Rs 2.4 billion (FY07: Rs 2.26 billion), an
increase of 8%. The cost of goods sold also increased by 8%. The sales are growing at a
declining rate as the increase in sales was by 23% in FY06, 12% in FY07 and 8% in
FY08.

The cost of goods sold followed a similar trend and hence the gross profit has remained
in the band of Rs 120 million to Rs 180 million over the period studied. In FY08, the
gross profit has shown improvement by 15% and stands at Rs 140 million (FY07: Rs 121
million). This is mainly due to decline in cost of goods sold from 16% in FY07 to 8% in
FY08. The staff benefits worth Rs 9.782 million (FY07: Rs 9.64 million) were given
while the company earned an R&D subsidy worth Rs 2.326 million (FY07: Rs 1.549
million). The main cost drivers were salaries, power, and other operating expenses while
the R&D subsidy neutralized the impact.

Net income of Fazal Textiles, increased in FY06, but booked a loss of Rs 20 million in
FY07. However, in FY08, the situation has changed and the company has made a profit
of Rs 10 million. The graph also shows that the proportion of after tax income has
declined considerably relative to gross profits. This is due to combination rising cost of
production due to inflated costs of raw materials, increase in interest rates and operating
expenses for the company. In FY08, the expenses and the finance cost have declined by
1% and 9% respectively which have significantly improved the bottom line of the
company. The PAT registers a 149% increase.

The profitability of the company has improved from FY07, but still, it is not up to the
level of the prior years. The gross profit margin has increased from 5.35% in FY07 to
5.72% in F08. Net profit margin has improved from -0.90% in FY07 to 0.41% in FY08.
The ROA has increased from -1.12% in FY07 to 0.30% in FY08. The total assets have
increased by 82% in FY08. This is mainly due to a huge increase in operating fixed assets
from Rs 250 thousand in FY07 to Rs 915 million in FY08. This is due to construction of
a new factory building and development of land in FB Area. The ROE has increased from
-2.88% in FY07 to 1.39% in FY08. The total equity has increased by 1%. This is
primarily due to improvement in net profits by 149%.

LIQUIDITY

The liquidity of Fazal Textiles is commendable, as the ratios have remained high. The
main reason for the strong liquidity of the company is that its current assets have always
been on the rise, with only the exception of 2007, where it fell by 12%. The main driver
was cash and bank balances and it showed an increase of 861% in FY08. The cash ratio
proves that, as it has increased from 0.001 in FY07 to 0.01 in FY08. This component
showed a declining trend in the past years but in FY08 it has shown a steep rise. The
current liabilities have increased by 48% in FY08 with the driver being accrued markup
as it has shown increase of 185%.

In FY08, the current ratio increased to 1.10 (FY07: 1.03). The current ratio increased in
2006, but showed a steep decline in 2007. The company has managed to keep its head
above the others even in the difficult year of 2007, when the entire textile industry as well
as our economy took a downward plunge. In that year the current assets went down
steeply, whereas the current liabilities were kept at almost the same level of FY06, which
saved the ratio from going further down. The quick ratio has remained constant at 0.68.
This is due to the offsetting impact between quick assets and current liabilities. The
increase in quick assets (current assets minus inventory) and current liabilities was 0% in
FY07 and 48% and 49% respectively in FY08. Hence the ratio remained constant despite
huge increase in stock in trade of 82% in FY08.

The company has shown an improved liquidity on the back of trade debts in the past few
years. Maintaining a high level of trade debts is not compatible with good asset
management and indicates that the cash is tied up. In FY08, improvement in the current
ratio is driven by cash. However, keeping surplus cash is also not in the interest of the
company as it has an opportunity cost attached. The company must find a balance
between these contradictory objectives. It must determine the optimum level of current
assets keeping the debt and asset management in view. After that the company must
maintain that optimum level consistently. Otherwise it will face liquidity difficulties.

ASSET MANAGEMENT RATIO

The Days Sales Outstanding (DSO) ratio has increased from 104 days in FY07 to 126
days in FY08. This is due to huge increase in trade debts by 30% in FY08 while net sales
have increased by 8%. This shows that the company's credit policy needs further
improvement, as the customers are not paying on time. The inventory turnover (ITO)
ratio has increased from 56 days in FY07 to 95 days in FY08. The stock-in-trade has
increased by a humungous amount of 82%, which shows that the company was not able
to sell off a considerable proportion of goods it manufactured.

The company produced more than the last year level but was not able to sell off
proportionately which indicates erroneous sales forecast. The operating cycle has thus
accumulated 60 additional days from FY07 and now stands at 221 days. The operating
cycle analysis shows that the rosy picture created with high liquidity ratios does not hold
up with the asset management analysis. Total asset turnover (TATO) has increased from
-0.011 in FY07 to 0.03 in FY08. This is due to the company making a profit this year, as
opposed to FY07 when it incurred a net loss. The company has also increased total assets
due to additions in fixed operating assets. This dampened the TATO, which would
otherwise have been higher. TATO was high in the initial years on back of high net profit
and low total assets.

Sales to equity (S/E) ratio has shown an inclining trend. S/E has increased from 3.19 in
FY07 to 3.39 in FY08. This is due to an 8% increase in the net sales and 1% increase in
the equity. Considering the gross profit margins and net profits the increase in this ratio
does not substantially impact asset management or profitability in a positive manner. The
sales are still insufficient to generate enough operating profit or cash flow to ensure and
sustain liquidity. Also the company needs to increase its equity base to finance substantial
growth in sales.

DEBT MANAGEMENT

The debt to asset ratio has decreased from 0.61 in FY07 to 0.48 in FY08. This is due to
82% rise in total assets while total debt increased by 44%. The debt to equity has
increased from 1.57 in FY07 to 2.23 in FY08. The equity increased by just 1%. The long-
term debt to equity ratio shows a declining trend from 0.12 in FY07 to 0.11 in FY08, due
to decline in deferred taxation. Hence the debt management ratios are in contradiction
with each other.
Fazal Textiles has been raising its borrowed amounts over the years. This has led to the
constant rise in the debt to equity ratio. The loans were used to stay competitive in
foreign markets and also to put some expansionary plans in action. In 2008 the company
took massive loans to stay in production after losses faced in 2007, which has led to high
debt ratio and which will raise the payables in the future. Fazal Textiles incurred
increased loans over the years, especially in short-term borrowing and trade payables.

The policy of the company was to keep the long-term loans as low as possible. Due to
this we see a steady stream of short-term borrowing over the years. Over the years, Fazal
Textiles has been facing increased finance costs due to increased interest rates over the
years due to the tight monetary policy. As a result the company pays more interest on the
same principal. Also the net income has been decreasing over the years, resulting in
decreased ratio of times interest earned. TIE ratio has increased from 1.02 in FY07 to
1.40 in FY08.

This is due to the company making a higher operating profit, which increased 25% owing
to increase in gross profit and lower operating expenses. The financial cost also showed a
9% decline in FY08. This contributes to improvement in the ratio. The company seems to
be able to finance interest expenses through operating profit/EBIT.

INVESTOR EXPECTATIONS

The earnings per share (EPS) of Fazal Textile has shown a volatile trend. The EPS has
improved from minus Rs 3.31 per share to Rs 1.62 per share. The company has recovered
and the positive EPS sends out positive signals to investors amid uncertainty in the textile
industry as a whole. Many textile companies have incurred losses over consecutive years.
However, in the current analysis of FZTM, only FY07 was the unfortunate year when the
company incurred loss. Also in FY08 the company is seen to be recovering quickly from
the setbacks it had in FY07. The EPS has translated into a favorable market price trend
for the stock till FY08.

The stock has begun to show a decline in FY09. The market price has shown a huge
increase from Rs 278.50 per share in FY07 to Rs 778.14 per share in FY08. Consequently
the P/E ratio shows an increase from minus 84.14 in FY07 to 480.33 in FY08. This can
also indicate that the stock is overvalued which shows the subsequent decline in market
value of the stock. Hence the P/E ratio indicating positive future expectations about the
stock are reversed with the low market values of the stock in FY09. Overall, Fazal
Textiles has shown some good trends over the years and promised the shareholders good
profits. The economic events of FY07 also hurt the company, but so far in FY08 it is seen
to be recovering quickly.

It has shown good profitability, liquidity and debt management trends, but its fault lies in
its large portions of cost of goods sold and asset management, which could hurt the net
income of the company. Hence Fazal Textiles has to be careful in managing its costs in
the future, to ensure that the shareholders get something back for keeping their
confidence in the company shares. The company has given dividend of Rs 1.5 per share
this year due to better profitability of the company vis-a-vis last year.

FUTURE OUTLOOK

The company has entered into a joint agreement with Lucky Textile Mills Limited for
opening a mall in Federal B. Area. The two companies intend to join plots and form a
special purpose vehicle to establish the mall. This was also the special business of the
company in the Annual General Meeting of FY08. This mall will be a source of
additional revenue for the company and will contribute to the other income.

The cotton crop estimate for the current season is 15 million of bales, which is quite
encouraging for the local consumption. However, inflation, rising costs and mark-up rates
can negatively impact the financial performance of the company. The company has also
decided to shift its production facilities to Nooriabad on Super Highway to increase its
production. Hence the company is expected to increase sales in terms of exports and
domestic consumption.

COMPANY SNAPSHOT
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Name of company FAZAL TEXTILE MILLS LTD
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Nature of Business Textile
Ticker FZTM
Sales FY '07 PKR 2,263,195,000
Sales FY '08 PKR 2,444,146,000
Share price (avg.) PKR 355
Market Capitalization 2,196,563,565